Spain: Little Relief from Catalan Elections

Published on September 29, 2015
SGH Insight
"But putting aside initial relief in having averted the potential high risk disaster of a greater than 50 percentage point vote for the pro-independence parties – a result which was frankly never reflected in the polls to begin with – we believe the “as expected” performance of the pro-independence parties in the weekend vote is still likely to generate more, not less, instability and polarization between Madrid and Barcelona, making negotiations on further autonomy and concessions from Madrid that much harder than previously thought."
Market Validation
(Bloomberg 11/9/15) "Spanish bonds slid for a fourth day, set for the longest losing streak in eight weeks, as Catalonia’s parliament passed a motion declaring the start of independence, a move that the Spanish Prime Minister Mariano Rajoy will block via a lawsuit before the Constitutional Court."

Spanish markets rallied yesterday after Sunday’s elections in Cataluña put Junts pel Si, the coalition of secessionist parties that ran openly on a plan to declare independence from Spain, short of an absolute majority in the Catalan Assembly, and two percentage points below the 50% threshold that would have given the independence movement clear additional momentum.

*** But putting aside initial relief in having averted the potential high risk disaster of a greater than 50 percentage point vote for the pro-independence parties – a result which was frankly never reflected in the polls to begin with –  we believe the “as expected” performance of the pro-independence parties in the weekend vote is still likely to generate more, not less, instability and polarization between Madrid and Barcelona, making negotiations on further autonomy and concessions from Madrid that much harder than previously thought. ***

More Polarizing Victories than Assumed

Junts pel Si, which won 62 seats out of 135, will now enter into contentious coalition talks – which could last to up to two months – to forge a majority agreement with Candidatura de Unidad Popular (CUP), the leftist, anti-capitalist party that will hold the balance of power in the Assembly with its 10 seats (see SGH 9/16/15, Spain: The Threat from Barcelona). The CUP has publically disavowed a deal with current President of the Generalitat and leader of Junts pel Si, Artur Mas, but we expect Mas to still be able to form a government and win a majority of votes in the Assembly, probably after negotiating an agreement leading to the abstention of the CUP.

Odds on other post-election alternatives bandied around are less than minimal – namely another round of elections or a broad coalition of the left. Under either alternative, a coalition of the leftist forces that includes parts of Junts pel Si, Si que es Pot (Cataluña’s Podemos party) and the Socialist Party of Cataluña (PSC), or another election, the independence movement would be severely damaged, and there is no discussion within the winning coalition itself of going down those routes.

We are also highly skeptical of widely assumed predictions of the possibility of these elections leading to the start of a more positive dialogue between Barcelona and the central government of Madrid.  Indeed the so-called initial “openings” from “President of the Government” Mariano Rajoy, as the Prime Minister is referred to in Spain,  so far have been simple reiterations of his long-standing, cautious but firm, position on the independence issue, and have not represented a real change in tone whatsoever.

And furthermore, it is far from granted that, come January, Rajoy will soften his position towards Cataluña, as almost universally expected, especially if his center-right Popular Party (Partido Popular) wins a popular mandate – or even a strong, though relative, majority – in the upcoming December general elections.  The Catalan issue will be a central theme of the campaign, and a victory by Rajoy’s PP in December, especially should it be facilitated by the President’s firmness on Cataluña, will provide little incentive for Rajoy to push for any further openings of significance.

And as a sign of potentially hardening battle lines, perhaps the most interesting result of the Catalan election was in the second place showing of the Ciudadans (Cataluña’s Ciudadanos) party on a strongly pro-union, nationalist platform. Ciudadanos is widely considered to be the most likely coalition partner if needed for Rajoy’s PP after the general elections, and has been rapidly gaining in national polls on the other new party on the block, the left leaning “Podemos.”

Meanwhile, despite the failure to break the 50% threshold, Mas has confirmed, as we also expected, that he will go forward with highly confrontational plans to create independent institutions, including on revenue collections, and that will be sure to trigger a crisis with Madrid despite the long fuse that has been set, in theory, for an independence vote in 18 months.

As a sign of the clash to come, the Spanish Courts just today slapped Mas with an injunction for illegal activities, namely the use of public funds, in his attempts at putting together a previous, November 9, referendum.

Tough Coalition Negotiations

The Catalan electoral results resulted, as widely expected, in a mixed picture for the secessionist movement in the richest region of Spain.

Junts pel Si won a relative majority of the votes, but it will be forced to rely on the backing, or at least the abstention, of the CUP, a party which has little or no agenda beside the clear and unequivocal pledge to achieve independence from Spain – if needed even through acts of civil disobedience.

Mas will have to rely on all of his political skills to now hang onto the leadership, and some say he may end up even having to sacrifice himself. But Convergencia de Cataluña, his party, holds a majority stake in the coalition and will be very reluctant to get rid of him as part of the negotiations to win the support of the CUP members, who will ultimately hold the cards on the leadership issue in an internal referendum.

There have been rumors that Mas could, instead of retaining the presidency of the Generalitat, give way to a different member of the coalition – he did indeed run as number four on the list – and lead the party instead in the general elections in December to supervise the independence process from Madrid.

But the rise of pro-Union and nationalist Ciudadanos (in Cataluña, “Ciudadans”) as the country’s third biggest party (and Cataluña’s second) is threatening to diminish the national leverage of Junts pel Si, and it is hard to believe the independence movement leader could agree to abandon his prominent role in Catalan politics only to end up marginalized in Madrid.

Barcelona and Madrid to Negotiate, but Why and How?

And this morning’s news out of Madrid, yet to be picked up by the financial press, that Artur Mas has been indicted by the Superior Tribunal of Cataluña for misuse of public funds and civil disobedience related to the November 9, 2014, “referendum” on Catalan independence all but affirms our expectations for how contentious the independence issue will remain even after the weekend elections.

Indeed, while always choosing his words carefully when referring to the Catalan independence movement, President Rajoy once again reminded pundits and journalists yesterday that there will be no exceptions for anyone, and that any negotiation with the Catalan counterparts will be conducted solely on the basis of the current fundamental law of the country.

And with the Catalan issue likely to remain at the forefront of the December general elections campaign, we believe, should the Popular Party win and Rajoy put in charge again of forming a government, as opposed to conventional wisdom, there is a strong chance he will double down on his opposition to any modification to the Spanish Constitution.

Meanwhile, from Barcelona’s perspective, it is hard to envision how for example a limited increase in fiscal transfers from Madrid could appease the independence movement – especially as the Catalan government charges ahead in unilaterally creating facts on the ground with the creation of its own revenue collection institutions.

It won’t help either that the CUP, the likely “external” ally of Junts pel Si, has manifestly declared it will even go as far as to promote civil disobedience to reach the independence goal: and as the recent Mas indictment shows, the Spanish judicial power is very sensitive to any crossing of the line between protests and crimes.

On the other side of the clash, Ciudadans, now the second biggest party in Cataluña and about to overtake Podemos to become the third party countrywide, just won 25 seats on the back of a firm, anti-independence, and pro-Madrid stance. We find it hard to imagine as widely assumed that they will be the catalyst to drive Rajoy to a softer position on Cataluña were the PP to call them into a coalition government after the December general elections.

And so while most analysts are expecting, or hoping for, a Kumbaya moment between Madrid and Barcelona come January, once the national campaign is over, we continue to believe the high level of polarization resulting from these hotly contested elections makes that unlikely.

As one final indication of that polarization, the former coalition partner of Convergencia, the Unio party, ran on its own over the weekend under a more moderate stance on independence, and was literally wiped out.

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